8 December 1995

PROFITS LOOKING GOOD BUT SUPPORT SAVES THE DAY…

Another year of good profits made 1994 a time to consolidate at Easton Lodge – to catch up with some badly needed re-investment. But this would not have been possible without subsidies, as James Hutchinson and Alison Smith of chartered accountants Touche in Agriculture told farms manager John Lambkin and FARMERS WEEKLYs business editor, Philip Clarke

WERE it not for area aid, growing crops at Easton Lodge would have been a profitless occupation in 1994.

Accounts prepared by Touche in Agriculture show that the total aid cheque for the 1994 harvest came to £47,674, but net farm income in the 12 months to Nov 30 was just £44,343. And, as accountants James Hutchinson and Alison Smith point out, this was before any private drawings.

This epitomises the precarious position many arable farmers are in despite the current bonanza. "Things look good now," says Mr Hutchinson. "But the next few years could be more of a bumpy ride, with volatile world prices, exchange rate risks and the possibility of area aid capping."

As such, he believes the challenge for Easton Lodge must be to grow wheat profitably without the support of subsidies.

Currently total costs for the crop are calculated at £105/t, based on 1994s yield of 7t/ha (2.8t/acre). Set against an average wheat price of £114/t that leaves limited scope for profit.

"If we include area aid at £28/t the situation improves and is sustainable. But if it is taken away Easton Lodge becomes a marginal farm," says Mr Hutchinson. "The aim must, therefore, be to bring production costs below world wheat prices or at least lower than those of our competitors."

This can be achieved in three ways:

&#8226 Reducing costs for the same tonnage produced.

&#8226 Increasing yield for the same total cost.

&#8226 Spreading costs over a wider area of farmland.

Opportunities for the first are limited at Easton Lodge. "It would be possible to shave 2% or 3% a year," suggests Mr Hutchinson. "But if we could lift average wheat yield to 8t/ha (3.2t/acre), then cost per tonne would drop overnight to £92."

Though farms manager, John Lambkin agrees with the principle, achieving it is easier said than done. "In 1993 we had a record yield of 8.3t/ha (3.4t/acre) and, if we had had our new agronomy package, could have managed much more. But this only happens one in five years. Two out of five years we have dry summers and, on our thin and stony land, that cripples us."

The low yield in 1994 was also due to the fact that 25% of the wheat area was put in after sugar beet and yielded just 5t/ha (2t/acre), although this was of bread-making quality. "Otherwise 8t/ha (3.2t/acre) would have been easily achieved. But sugar beet is a successful part of our rotation and I would not want to farm without it," says Mr Lambkin. Growing quality winter wheat, even at these yields, is marginally better than spring cropping, he adds.

That leaves the other tactic of cost saving.

With one combine on just 171ha (422 acres) of combinable crops that certainly looks extravagant, says Mr Hutchinson. But combine sharing is ruled out.

First, Easton Lodge already has a good lease deal that works out at £41/ha (£17/acre) including repairs and insurance. Second, the wide portfolio of crops means flexibility is crucial. "We would have to rethink our cropping strategy if we wanted to combine share," says Mr Lambkin.

"But what we do need is more land over which to spread overheads," he adds. "However, at current rates for contract farming we would have to be tendering at least £120/acre just to get a foot in the door."

The other side of the equation is the value per tonne. "We are never going to be a 10t/ha farm but we can earn good premiums for seed and quality crops. This is the logical way to go."

In 1994 four of the crops cultivated at Easton Lodge were grown for seed – namely oilseed rape, herbage seed, linseed and peas. Oilseed rape was definitely the "star performer", says Mr Lambkin.

As a relatively drought resistant crop it achieved a yield of 3.6t/ha compared with 3.45t/ha the previous season. And as a seed crop it fetched a premium price of £239/t leading to a 26% increase in output to £1228/ha (£497/acre). "Unfortunately we only grew 11ha of the stuff," says Mr Lambkin.

Oilseed rape was just one of four crops topping £1000/ha (£400/ acre) gross output. Winter wheat, sugar beet and herbage seed also obliged.

With an average price of £114/t, winter wheat made just £1 less than the previous season as the crop continued to benefit from the weakness of sterling and the strengthening world market. Area aid also increased from £140/ha (£57/acre) to £194/ha (£79/acre) in the second year of CAP reform.

But overall wheat output fell from £1124/ha (£455/acre) to £1067/ha (£432/acre) due to the lower yield.

The drought also took its toll on sugar beet, which suffered a 23% drop in yield to 43.9t/ha (17.8t/ acre). Returns from British Sugar were slightly higher but not enough to prevent a 15% fall in output to £1667/ha (£675/acre).

One new crop to be grown in 1994 was dried peas, replacing winter beans in the rotation. The 2.9t/ha (1.2t/acre) yield was below "average" but was more than compensated for by a price of £134/t.

Though lower yields led to lower output for most crops at Easton Lodge, the Touche in Agriculture accountants were impressed with the way variable costs have been controlled (although they warn of 10% to 15% increases in the next two years).

Winter wheat, grown on 56% of the sown area (compared with 40% in 1993), had the lowest variable costs for four years, with the biggest savings made on the fertiliser bill. "We had the whole farm soil tested and decided we could take a year off applying P and K," explains Mr Lambkin.

"Spray costs were also down, especially for sugar beet, reflecting our agronomic advice and the setting up of a new agrochemical buying group." Wide use was also made of farm-saved seed.

As a result gross margins for wheat were only 5% down at £870/ha (£352/acre) despite the lack of rain. But variable cost savings were not enough to offset the effects of yield loss on sugar beet, which suffered a 17% fall in gross margins to £910/ha (£368/acre).

In contrast, oilseed rape and herbage seed incurred higher variable costs in 1994. But better yields for the former, and higher prices for both, meant that oilseed rape achieved a 31% rise in gross margin to £962/ha (£389/acre), while herbage seed was up 2% at £1024/ha (£414/acre).

Peas produced a gross margin of £500/ha (£202/acre), just 3.6% below the five-year average for beans. "Any gross margin loss must be traded off against the positive benefits of an earlier harvest such as minimising labour peaks, relieving combine pressure and reducing the risk of crop failure through weather problems," observes Mr Hutch-inson.

On an accumulated basis these crop performances generated a cultivations gross margin of £181,048, equivalent to £736/ha (£298/acre) after stock adjustments.

This was considerably better than the £639/ha (£259/acre) of 1993. But that was due to 15ha (37 acres) being taken out of production for the Cereals Event.

As such, "other income" in 1993 was higher at £178/ha (£72/acre) compared with £93/ha (£38/acre) in 1994, reflecting the £12,869 compensation paid to Easton Lodge by the Royal Agricultural Society of England for holding the event. (This was equivalent to growing a crop of first wheat.) A change in the accounting period at farmers weeklys other farm, Mill Farm, also led to a reduction in recorded "management fees".

Including this "other income" total farm gross margin came to £203,587, or £829/ha (£335/acre) after stock adjustments. This was 1.5% up on 1993. Much of this improvement was due to good variable cost control in a dry year. But overheads were more of a mixed bag.

Labour costs fell by 14%, despite the Agricultural Wages Board average increase of 4.9% that year, due to the retirement of farm worker Bill Cooper part way through the previous year. At £175/ha (£71/acre), Easton Lodge is now more in line with other farms in the eastern counties.

Power and machinery costs were also down, at £243/ha (£98/acre). "This compares favour- ably with our regional average of £264 (£103)," says Mr Hutch-inson. "One major saving is that Reed Business Publishing has taken on the vehicle insurance."

But depreciation has increased (from £12,363 to £16,227) due to new machinery purchases the previous year – in particular the new Fendt 395 GTA tractor and a combination power harrow/drill unit.

This trend is continuing with further new investments in 1994, including a second-hand JCB Loadall for £11,775 and a 20m Knight sprayer for £12,750.

Property charges fell by 18% to £47/ha (£19/acre) in contrast with other farms in the region which saw theirs go up by 20% to £59/ha (£24/acre). "Many farmers chose to maximise tax relief on repairs in the last year before the transitional period as the run-up to the current year basis of assessment begins," explains Mr Hutchinson.

This is not a consideration at Easton Lodge, as Reed Business Publishing, as a company, is not affected by the change. But property charges will increase in the 1995 accounts, as money has been spent on the one-mile drive and three miles of tracks.

The most significant change in fixed costs, however, is in "other overheads", which almost doubled to £20,533, equivalent to £85/ha (£34/acre).

Most of this increase relates to the £9470 professional fees incurred when negotiating a new rent in 1994. The details of this are complex, but, in essence, Easton Lodge applied for a rent reduction in early 1993 in anticipation of falling profits due to CAP reform. However, the landlord, Burghley Estates, responded with a claim for a rent rise.

The matter eventually went to arbitration, ending in a 16% rent rise to £27,150 a year, or £112/ha (£45/acre). As part of the process Easton Lodge employed an expert witness and also had to pay agents fees, arbitrators costs, plus a contribution towards the landlords costs.

Although this was disappointing, Mr Hutchinson is quick to point out that it was not out of line with rent reviews on similar farms in the area. Mr Lambkin is equally philosophical. "It is still less than we were paying in 1985 before farm incomes really nose-dived."

The effect of the rent increase was not fully felt in the year to Nov 30, 1994, as it only took effect from April of that year. But it was still enough to turn a decent gain in net farm income before rent into a small drop after rent.

At £171/ha (£69/acre), total farm profit was just 2% down on the previous season and an encouraging 35% above the rolling five-year average.

Turning to cash flow, Mr Hutchinson observes that a second year of reasonable farm income coincided with further outlay on replacement machinery. This led to a "cash neutral" position with a surplus of just £274.

In this analysis Mr Lambkin is treated as a sole trader to help comparison with other farm businesses. "Drawings" are assumed at £20,000, with tax and Class 4 national insurance at £6262. "Tax would have been higher but with all the reinvestment there are plenty of capital allowances coming through," says Mr Hutchinson.

Clearly the farm has been making up for three mediocre years from 1990 to 1992 when low farm income led to low investment.

"But, now this is out of the way, the next two seasons should generate a much healthier cash surplus. For a sole trader this would present an opportunity to start sorting out things like succession arrangements, pensions and other off-farm investments."

Given the threats to long-term profitability for all arable farmers these opportunities may be shortlived. &#42

Touche in Agriculture is part of Touche Ross, a leading national firm of chartered accountants and management consultants with offices across the UK. It has a team of specialists providing help and advice to the farming community and agri-businesses.


Profit and loss account – year end Nov 30, 94

19941993

(£/ha)(£/ha)

Farm gross

margin181,048179,021

Other farm

income (Sheep

keep, contracting

management

fees and rent)22,53937,496

Total203,587216,517

Overhead costs

Labour42,36849,429

Power &

machinery58,89660,394

Property

charges11,27213,897

Other overheads20,53311,136

Total133,069134,856

Net farm income

(Before rent

and profit on

asset sales)70,51881,661

Rent26,17523,400

Profit on

asset sales-(2779)

Total26,17520,621

Net farm

income44,34361,040


Easton Lodge 1994 cropping

Cropha

Winter wheat110

Oilseed rape11

Sugar beet26

Dry peas15

Herbage seed13

Linseed17

Kale seed5

Set-aside28

Total225


Arable summary

19941993

(ha)(ha)

Cultivated area225210

Permanent grass1212

Other land (roads

and buildings)520

Total area242242

(£/ha)(£/ha)

Farm gross margin748716

Stock adjustments(12)(77)

Other income93178

TOTAL829817

Overhead costs

Labour175204

Power/machinery243250

Property charges4757

Other overheads8546

TOTAL550557

Net farm income

(Before rent and

asset sales)279260

Rent and asset sales10885

Net farm income

(harvest year basis)171175


Arable statistics

19941993

harvestharvest

YIELD (t/ha)

Winter wheat7.088.30

Oilseed rape3.603.45

Sugar beet43.8656.99

(inc C beet)

Dry peas2.88-

Herbage seed1.401.69

Linseed1.001.79

Kale seed0.32-

PRICE (£/t)

Winter wheat114115

Oilseed rape239166

Sugar beet3835

(inc C beet)

Dry peas134-

Herbage seed775689

Linseed314185

Kale seed1,986-

OUTPUT* (£/ha)

Winter wheat1,0671,124

Oilseed rape1,228971

Sugar beet1,6671,971

(inc C beet)

Dry peas745-

Herbage seed1,2871,235

Linseed800810

Kale seed626-

Set aside315253

VARIABLE COSTS (£/ha)

Winter wheat197211

Oilseed rape266236

Sugar beet757877

(inc C beet)

Dry peas245-

Herbage seed263230

Linseed205292

Kale seed187-

GROSS MARGIN (£/ha)

Winter wheat870913

Oilseed rape962735

Sugar beet9101,094

(inc C beet)

Dry peas500-

Herbage seed1,0241,005

Linseed595518

Kale seed439-

*Includes area aid and straw sales.


Easton Lodge arable unit – five-year cash flow (£)

Harvest year19941993199219911990

Net farm income44,34361,04025,11330,93127,163

Add back non-cash item:

Depreciation net of

profit on sale18,34212,89715,93015,59216,509

62,68573,93741,04346,52343,672

Reinvestment in fixed assets

(net) (a)(36,149)(52,356)(4,100)(8,982)(15,258)

Taxation (b)(6,262)(5,705)(7,404)(6,330)(8,035)

Drawings (c)(20,000)(19,000)(18,000)(17,000)(16,000)

Change in working

capital (d)—–

Cash increase or

(decrease)274(3,124)11,53914,2114,379

(a) Actual fixed asset additions (net of sale proceeds).

(b) Income tax and Class 4 National Insurance based on taxation as a sole trader with no other income. Averaging of profits has been assumed where beneficial for tax purposes.

(c) Estimate, assuming the farm is the only source of income for one family.

(d) Assumes no change in levels of year end stocks, debtors and creditors.


Overhead costs- year end Nov 30, 1994

19941993(£) (£)

LABOUR

Wages42,36849,429& salaries

POWERANDMACHINERY

Machinery &17,23421,742vehicle repairs

Fuel & oil9,0727,383

Electricity3,3794,381

Vehicle tax 7701,772and insurance

Contract & hire12,21412,753

Depreciation16,22712,363

58,89660,394

PROPERTY CHARGES

Water rates1,0881,112

Property repairs8,0699,472

Depreciation2,1153,313

11,27213,897

OTHEROVERHEADS

General insurance-1,291

Professional fees9,470150

Telephone3,1702,843

Office5,8554,681

Subscriptions1,7341,468

Sundry expenses304703

20,53311,136

RENTANDFINANCE

Rent26,17523,400

Profit on -(2,779)

asset sales26,17520,621

Spraying at Easton Lodge is now carried out with a 20m Knight sprayer loaded on the back of a Fendt 395 GTA and fed by a Rau tank. The resulting wheat crop made a gross margin of £870/ha form harvest 1994.

Better pofits have paved the way for much needed re-investment at Easton Lodge, including this JCB Loadall.

Touche Rosss accountants Alison Smith and James Hutchinson.

Sugar beet was badly hit by drought in 1994, which suffered a 23% drop in yield and a 17% drop in gross margin, despite savings in spray costs.

Farming on thin and stony land means Easton Lodge is always vunerable to summer droughts as is demonstrated by the yields seen in 1994.